Dear Liz: Before we bought our house, should we have refinanced?

Dear Liz,

My husband and I bought a home in a suburb of Chicago a few years ago. We’ve been keeping our house payment at $1,200 per month. We’ve bought the home without ever having to come close to selling it, and we’ve already drawn down the $60,000 loan. The house is in a good school district, but we could go one of two ways with that loan — pay it off in the next year or two, or pay it off one to three years after that, so we can pay less each month. Which is better for our budget and savings?


Dear Virginia,

First of all, congratulations on discovering the property market is not entirely insane. You, I hope, are delighted that you haven’t had to sell, though it’s going to be at least a few years before that happens.

You probably did an excellent job of understanding the monthly financial obligations of your homeownership, having only known your chosen state for only a few years, but there are certain things you could have done before moving in, to free yourself from all the paperwork headaches that come with a new mortgage.

For instance, you should have asked about homeowners insurance, which can be extremely expensive without insurance coverage. It’s important to have enough coverage because weather catastrophes like storms and tornadoes can eat away at your investment.

You also might have stopped paying attention to your next property tax bill and paid it during the year when it was due, since the property taxes in your area typically go up more in November than at any other time during the year. Your fine government savings account is now in jeopardy.

There are several other things you could have done to free up the money you want to put toward your mortgage. For instance, you could have put part of your purchase on a short sale, which could have earned you thousands of dollars in the process.

Remember, this is the property you want to make payments on and not simply pay a little bit every month. You can do this while simultaneously earning additional cash flow with a short sale or with selling other real estate, which can still be a good idea after a short sale. But unless you’re going to sell for $100,000 more than you paid for the home, selling a little while still paying a lot will earn you quite a bit of extra cash flow.

Finally, you could have refinanced your mortgage after you moved in and paid off the balance in full. Even if you did so while you still owed money on the mortgage, your loan rate would have been different from that of the next mortgage you took out. And not only would you have still been making payments, but you would have been carrying a low-rate loan for a long time, which would benefit you now and in the future.

If you have at least $500,000 in assets, consider refinancing your loan to a “no doc” type of loan, which could carry a lower interest rate than you could get on the conventional loan you’re currently on. Check with a mortgage professional to determine what mortgage rate would be appropriate for you.

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